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Measuring National
Output and National
Income
6
CHAPTER OUTLINE
Gross Domestic Product
Final Goods and Services
Exclusion of Used Goods and Paper Transactions
Exclusion of Output Produced Abroad by
Domestically Owned Factors of Production
Calculating GDP
The Expenditure Approach
The Income Approach
Nominal versus Real GDP
Calculating Real GDP
Calculating the GDP Deflator
The Problems of Fixed Weights (Method of
Measuring
RGDP)
Limitations of the GDP Concept
GDP and Social Welfare
The Informal Economy
Gross National Income per Capita
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Gross Domestic Product
gross domestic product (GDP) The total market value of all
final goods and services produced within a given period by
factors of production located within a country.
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Final Goods and Services
final goods and services Goods and services produced for
final use.
Example: eggs you buy, cook and then eat at home
intermediate goods Goods that are produced by one firm for
use in further processing by another firm.
Example: eggs S&P buys, bakes and it sells the cakes
made of eggs
value added The difference between the value of goods as they
leave a stage of production and the cost of the goods as they
entered that stage.
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value added
We can sum up the value added at each stage of production
or we can take the value of final sales.
TABLE 6.1 Value Added in the Production of a Gallon of
Gasoline (Hypothetical Numbers)
Stage of Production
Value of Sales
Value Added
$3.00
$3.00
(2) Refining
3.30
0.30
(3) Shipping
3.60
0.30
(4) Retail sale
4.00
0.40
(1) Oil drilling
Total value added
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$4.00
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Exclusion of
Used Goods and Paper Transactions
GDP is concerned only with new, or current, production.
• Old output is not counted in current GDP because it was
already counted when it was produced.
GDP does not count transactions in which money or goods
changes hands but in which no new goods and services are
produced.
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Exclusion of Output Produced Abroad by
Domestically Owned Production Factors
GDP is the value of output produced by factors of production
located within a country.
gross national product (GNP) The total market value of all final
goods and services produced within a given period by factors of
production owned by a country’s citizens (or a country’s factors
of production), regardless of where the output is produced.
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Calculating GDP
expenditure approach A method of computing GDP that
measures the total amount spent on all final goods and services
during a given period.
income approach A method of computing GDP that measures
the income—wages, rents, interest, and profits—received by all
factors of production in producing final goods and services.
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The Expenditure Approach
Four main categories of expenditure:
Personal consumption expenditures (C): household spending
on consumer goods
Gross private domestic investment (I): spending by firms and
households on new capital, that is, plant, equipment,
inventory, and new residential structures
Government consumption and gross investment (G)
Net exports (EX − IM): net spending by the rest of the world,
or exports (EX) minus imports (IM)
GDP = C + I + G + (EX − IM)
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Components of U.S. GDP, 2012
The Expenditure Approach
Billions of Dollars
Personal consumption expenditures (C)
Durable goods
Nondurable goods
Services
Gross private domestic investment (l)
Nonresidential
Residential
Change in business inventories
Government consumption and gross
investment (G)
Federal
State and local
Net exports (EX – IM)
Exports (EX)
Imports (IM)
Gross domestic product
11,119.5
Percentage of GDP
70.9
1,218.8
2,563.0
7,337.7
2,059.5
7.8
16.3
46.8
13.1
1,616.6
382.4
60.6
3,063.6
10.3
2.4
0.4
19.5
1,214.2
1,849.4
−566.7
7.7
11.8
−3.6
2,179.7
2,746.3
15,676.0
13.9
17.5
100.0
Note: Numbers may not add exactly because of rounding.
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Personal Consumption Expenditures (C)
personal consumption expenditures (C) Expenditures by
consumers on goods and services.
• durable goods Goods that last a relatively long time, such
as cars and household appliances.
• nondurable goods Goods that are used up fairly quickly,
such as food and clothing.
• services The things we buy that do not involve the
production of physical things, such as legal and medical
services and education.
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THINKING PRACTICALLY
1. John has a 2009 Honda Civic. In 2013, he sells it to Mary for
$10,000.
Is that $10,000 counted in the GDP for 2013?
2. If John is an automobile dealer, does that change your answer
to Question 1 at all?
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Gross Private Domestic Investment (I)
gross private domestic investment (I) Total investment in
capital—that is, the purchase of new housing, plants, equipment,
and inventory by the private (or nongovernment) sector.
• nonresidential investment Expenditures by firms for
machines, tools, plants, and so on.
• residential investment Expenditures by households and
firms on new houses and apartment buildings.
• change in business inventories The amount by which
firms’ inventories change during a period. Inventories are the
goods that firms produce now but intend to sell later.
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Gross Investment v.s. Net Investment
depreciation The amount by which an asset’s value falls in a
given period.
gross investment The total value of all newly produced capital
goods (plant, equipment, housing, and inventory) produced in a
given period.
net investment Gross investment minus depreciation.
capitalend of period = capitalbeginning of period + net investment
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Government Consumption and Gross
Investment (G)
government consumption and gross investment (G)
Expenditures by federal, state, and local governments for final
goods and services.
Net Exports (EX − IM)
net exports (EX − IM) The difference between exports (sales to
foreigners of domestically-produced goods and services) and
imports (Thailand’s purchases of goods and services from
abroad).
•The figure can be positive or negative.
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The Income Approach
national income The total income earned by the factors of
production owned by a country’s citizens.
• compensation of employees Includes wages, salaries, and
various supplements
• rental income The income received by property owners in
the form of rent.
• net interest The interest paid by business.
• proprietors’ income The income of unincorporated
businesses.
• corporate profits The income of corporations.
• surplus of government enterprises Income of government
enterprises.
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• indirect taxes minus subsidies Taxes such as sales taxes,
customs duties, and license fees less subsidies that the
government pays for which it receives no goods or services in
return.
• net business transfer payments Net transfer payments by
businesses to others.
US National Income, 2012
National income
Compensation of employees
Proprietors’ income
Rental income
Corporate profits
Net interest
Indirect taxes minus subsidies
Net business transfer payments
Surplus of government enterprises
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Billions of
Dollars
13,833.2
8,559.8
1,203.0
463.5
1,939.3
504.1
1069.6
127.9
−34.0
Percentage of
National Income
100.0
61.9
8.7
3.4
14.0
3.6
7.7
0.9
−0.2
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GDP, GNP and National Income
net national product (NNP) Gross national product minus depreciation; a
nation’s total product minus what is required to maintain the value of its capital
stock.
statistical discrepancy Data measurement error.
NNP = NI + SD
GNP = NNP + Depreciation
TABLE 6.4 GDP, GNP, NNP, and National Income, 2012
GDP
Plus:
Less:
Equals:
Less:
Equals:
Less:
Equals:
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Receipts of factor income from the rest of the world
Payments of factor income to the rest of the world
GNP
Depreciation
Net national product (NNP)
Statistical discrepancy
National income
(Billions USD)
15,676.0
+774.1
−537.0
15,913.1
−2,011.4
13,901.7
−68.5
13,833.2
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National Income versus Personal Income
personal income The total income of households.
disposable (personal) income Personal income minus
personal income taxes.
• The amount that households have to spend or save.
personal saving The amount of disposable income that is left
after total personal spending in a given period.
personal saving rate The percentage of disposable income
that is saved.
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Example of NI, PI, DI and Personal Saving
National Income, Personal Income, Disposable Income, and Personal Saving
2012
(Billions USD)
National income
Less: Amount of national income not going to households
Equals: Personal income
Less: Personal income taxes
Equals: Disposable personal income
Less: Personal consumption expenditures
Personal interest payments
Transfer payments made by households
Equals: Personal saving
Personal saving as a percentage of disposable personal income:
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13,833.2
−430.8
13,402.4
−1,471.9
11,930.6
−11,119.5
−172.3
−168.1
470.8
3.9%
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Nominal GDP versus Real GDP
nominal GDP Gross domestic product measured in current
dollars/prices.
• Current dollars/prices The current prices that we pay for
goods and services.
real GDP Gross domestic product measured in base-year
dollars/prices.
• Base-year dollars/prices The prices that take place in the
(selected) base year.
weight The importance attached to an item within a group of items.
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Calculating Real GDP (Covered in Discussion)
A Three-Good Economy
(1)
(2)
Production
Year 1 Year 2
Q1
Q2
(3)
(4)
Price per Unit
Year 1 Year 2
P1
P2
(5)
GDP in
Year 1 in
Year 1
Prices
P1 × Q1
(6)
GDP in
Year 2 in
Year 1
Prices
P1 × Q2
(7)
GDP in
Year 1 in
Year 2
Prices
P2 × Q1
(8)
GDP in
Year 2 in
Year 2
Prices
P2 × Q2
$0.50 $0.40
$3.00
$5.50
$2.40
$4.40
Good A
6
11
Good B
7
4
0.30
1.00
2.10
1.20
7.00
4.00
Good C
10
12
0.70
0.90
7.00
8.40
9.00
10.80
$12.10
$15.10
$18.40
$19.20
Total
Nominal
GDP in
year 1
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Nominal
GDP in
year 2
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Calculating the GDP Deflator
(Covered in Discussion)
Policy makers not only need good measures of how real output
is changing but also good measures of how the overall price
level is changing.
The GDP deflator is one measure of the overall price level.
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Problems of Real GDP or the Method of
Fixed Weights
The use of fixed-price weights does not account for the
responses in the economy to supply shifts.
The fixed-weight procedure ignores the substitution away from
goods whose prices are increasing and toward goods whose
prices are decreasing or increasing less rapidly.
For example:
GDP has been measured since 1940s.
If we would like to measure all the years of RGDP from 1950 to
2015, which year should we choose as the BASE year?
1950 or 2015?
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Limitations of the GDP Concept
GDP and Social Welfare
If crime levels went down, society would be better off, but a
decrease in crime is not an increase in output and is not
reflected in GDP.
An increase in leisure is also an increase in social welfare,
sometimes associated with a decrease in GDP.
Most nonmarket and domestic activities, such as housework and
child care, are not counted in GDP even though they amount to
real production.
GDP also has nothing to say about the distribution of output
among individuals in a society.
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The Informal/underground Economy
informal economy The part of the economy in which
transactions take place and in which income is generated that is
unreported and therefore not counted in GDP.
Any example?
Gross National Income per Capita
gross national income (GNI) GNP converted into dollars using an average of
currency exchange rates over several years adjusted for rates of inflation.
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What Better Describes Your Happiness?
GDP/GNP or GDP/GNP per Capita
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Per Capita Gross National Income for
Selected Countries, 2011
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REVIEW TERMS AND CONCEPTS
base year
gross domestic product (GDP)
change in business inventories
gross investment
compensation of employees
gross national income (GNI)
corporate profits
gross national product (GNP)
current dollars
gross private domestic investment (I)
depreciation
income approach
disposable personal income, or after-tax
income
indirect taxes minus subsidies
durable goods
intermediate goods
expenditure approach
national income
final goods and services
national income and product accounts
fixed-weight procedure
net business transfer payments
informal economy
government consumption and gross
investment (G)
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REVIEW TERMS AND CONCEPTS
net exports (EX − IM)
rental income
net interest
residential investment
net investment
services
net national product (NNP)
statistical discrepancy
nominal GDP
surplus of government enterprises
nondurable goods
value added
nonresidential investment
weight
personal consumption expenditures (C)
Expenditure approach to GDP: GDP =
C + I + G + (EX − IM)
personal income
personal saving
personal saving rate
proprietors’ income
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GDP = Final sales + Change in
business inventories
capitalend of period = capitalbeginning of period +
net investment
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